Investment Management Firms (Portfolio Management)
Assuming you choose not to manage your own funds, the most direct path to the strategy, confidence and consistency required to achieve favorable long-term returns is working with a Registered Investment Advisor. That advisor’s registration will be with the Securities & Exchange Commission (SEC) or at the state level.
Investment management firms offer individual portfolio management or mutual funds that they themselves have created and are managing. The investment professionals who work for these firms have often earned the Chartered Financial Analyst® (CFA) designation from the CFA Institute and may have significant experience performing rigorous investment analysis.
This option puts you directly in contact with the investment expertise you’re hiring—the expertise that will be used to choose the specific investments in your portfolio or fund.
An important advantage of working with an investment management firm is that you will have an opportunity to get to know the investment strategy or strategies used to manage your portfolio as well as create personal relationships with the people who are managing your savings. You’ll be working directly with the people making investment decisions for your portfolio—not resellers or re-packagers of someone else’s work.
It’s important to understand enough about the strategy your manager uses that you have a high level of confidence in its ability to generate favorable long-term results. There are a variety of valid long-term strategies, each with its own strengths and weaknesses. When hiring an investment manager find one that utilizes a strategy that you are comfortable with—that you can live with when it’s working and when its weaknesses are more apparent.
Is the strategy growth, momentum, blue-chip, value, trading? Each manager should be happy to share with you the details of how their strategy works and provide audited, historical performance records—although past performance is not an indication of future results. Confidence in a long-term investment strategy will allow you to stick with it during those short-term periods when results appear weak. In this way you’ll have the opportunity to achieve long-term results consistent with your long-term financial plan.
Another advantage of working directly with an investment manager is that many will provide you with an investment review that illustrates how the investment decisions made for your portfolio/fund were consistent with the strategy you hired them to provide. This should also increase your confidence that the strategy you were comfortable with when you hired the manager is being consistently executed in your portfolio or fund.
Aside from managing your own funds, this may be your best opportunity to gain the highest level of confidence in both the strategy and the people involved—confidence that will allow you to stay the course and improve the possibility that you’ll achieve superior long-term performance.
Portfolio managers are generally paid an annual fee based on a percentage of your assets under management. Investment management firms do not have actual physical possession of your funds, only the power which you assign them to manage the investments in your account(s.) Your investments are kept in a custodial account with a separate firm—such as Fidelity or Merrill Lynch—which may charge an annual fee for custodial services. This fee is usually $50 to $200.
Trading costs are passed through and charged to your portfolio/fund. The manager pays these commissions to a trading broker and should not benefit from them. In fact, since these costs reduce investment performance, the manager is incented to minimize trading costs to only those necessary to effectively execute the strategy.
Minimum account sizes can range from $100,000 to $1,000,000, depending on the manager.